There is no denying the satisfaction that comes with obtaining a signed letter of intent from both the buyer and seller. However, it’s crucial to recognize that due diligence has yet to be completed. No deal is final until the seller undergoes this process and commits to proceeding.
In Stanley Foster Reed’s insightful book, The Art of M&A, Reed emphasizes that the goal of due diligence is to “assess the benefits and liabilities of a proposed acquisition by investigating all relevant aspects of the business’s past, present, and foreseeable future.” Reed highlights the importance of thoroughly examining every aspect of a business and its potential trajectory.
Due diligence is inherently comprehensive, and it’s no surprise that many deals falter during this critical stage. Therefore, it is prudent for both buyers and sellers to consult with key team members, such as lawyers and accountants, before embarking on due diligence.
Reviewing All Aspects of a Business
There are numerous factors that buyers and sellers should consider before initiating due diligence. A checklist addressing these areas is essential. For instance, accounts receivable should be scrutinized to identify outstanding debts. Similarly, inventory should undergo thorough examination.
Environmental concerns, often underestimated by sellers, can derail a deal swiftly. Issues such as lead or asbestos contamination, or water pollution, require careful assessment due to potentially substantial remediation costs and time commitments.
If the business holds trademarks, patents, or copyrights, these valuable assets must be properly documented and their transferability confirmed. They are critical to the business’s current and future value.
The strength of any business lies in its key employees and management. Sellers should evaluate their team for any weaknesses, while buyers must gain a comprehensive understanding of the workforce. Over-reliance on the owner or key personnel can signal risks.
For example, in manufacturing, it is imperative to evaluate all aspects of the production process. The condition of equipment, its anticipated lifespan, efficiency, and overall value are crucial considerations. Identifying key suppliers and assessing their reliability is equally essential.
Due diligence is pivotal for buyers to comprehend the true nature of the business being sold. Sellers can leverage this process to highlight their business’s strengths and address any weaknesses.
Through due diligence, stakeholders can gain insights into critical factors, such as the company’s competitive edge, long-term potential, status of team members, customer and supplier relationships, and more. Business brokers and M&A advisors are well-versed in every facet of due diligence and can guide stakeholders through this complex process.